Sunday 27 December 2015

Could the oil market fit into the Cournot model?

The Cournot model needs to have several characters. Firstly, firms need to have market power. Secondly, the products have to be homogeneous. Thirdly, the number of firms is fixed. Fourthly, firms are economically rational. Fifthly, firms do not cooperate. Sixthly, firms compete in quantities. In the oil market, firms are the countries that export oil. And I can see that the oil market has the first three characters and the last one. As these countries have some market power to affect the overall supply of the market and influence the oil price. Moreover, the number of these countries is fixed and they all export the same product, oil. These countries compete in quantities, as they choose their quantities to produce each year. However, the countries sometimes make their decisions based on some political reasons, so they are not always economically rational. They often cooperate, as some of these countries found the Opec. Therefore, the oil market does not completely fit into the Cournot model

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